Monetary and Fiscal Policy Interactions in a Micro-Founded Model of a Monetary Union
By R. Beetsma, H. Jensen. Social Science Research Network, 2005
329 citations recorded by the source corpus.
So far, the 'New Open Economy Macroeconomics' literature has primarily focused on monetary policy and monetary policy rules, rather than paying attention also to fiscal policy. This is an omission because, especially with the advent of EMU, the burden on fiscal policy as an instrument for macroeconomic stabilization has potentially increased. In this Paper, we focus on the interactions between monetary and fiscal policy in a micro-founded model of monetary union. By extending a two-country, New-Keynesian model with public spending, we find that the forward-looking Phillips curves depend on consumption, terms of trade and public spending deviations from their respective stochastic natural rates. We study the optimal coordinated monetary and fiscal policies for various settings. Generally, we find that the gains from policy commitment and from the use of fiscal policy as an instrument for stabilization are economically non-trivial. We also consider simple monetary and fiscal policy rules and investigate to what extent these rules can approximate the optimal solution under commitment.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/70fd7d5dca7455cb20621a22a16b256ed11c8f97
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In Economics and Econometrics
- Manuel Amador
- Mark Aguiar
- Massimo Giuliodori
- Emmanuel Farhi
- Gita Gopinath
- R. Beetsma
- J. Hatchondo
- Leonardo Martinez
Citations in the corpus
- Coordination and Crisis in Monetary Unions (2015, background): “There exists an important literature jointly analyzing fiscal and monetary policies in a monetary union in the presence of new Keynesian frictions, such as Beetsma and Jensen (2005), Gali and Monacelli (2008), Ferrero (2009), and Farhi and Werning (2013).”
- The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research (2010, positive): “Examples are Pierpaolo Benigno (2004), which is extended by Roel M. W. J. Beetsma and Henrik Jensen (2005) to include fiscal policy.”